United States Institute of Peace

Iran’s Growing Dependence on China

The Atlantic Council has issued a new report entitled “Iran Turns to China, Barter to

Survive Sanctions.” The following is an excerpt, with a link to the entire survey at the bottom.

The big story of the last decade for Iranian trade has been that of increasing reliance on China. Since 2001, Chinese exports to Iran have increased nearly sixteen-fold, to $12.2 billion, while Iranian exports to China last year amounted to $16.5 billion, primarily crude oil. China’s trade with Iran accounts for nearly 18 percent of Iran’s total commerce, and is second only to that with the entire twenty-seven-member European Union.

Bijan Khajehpour, a veteran Iranian business consultant now based in Vienna, said that Iran often does not receive hard currency for its exports to China. “The accounts stay in China and [the money] is spent on imports,” he said.

Iranians grumble about this dependency and would prefer more Western European technology, but the Iranian economy continues to function, albeit less efficiently. Much

of the trade is conducted by Iranian state-run companies, semi-governmental bodies, and firms controlled by the revolutionary Guards, which have taken over large chunks of the Iranian economy in recent years. The Chinese government actively promotes Iran trade; its commercial delegations even stay at the compound of the Chinese ambassador in Tehran and do not interact with the Iranian public, Khajehpour said. The resulting deals are opaque and subject to corruption.

As controversy over Iran’s nuclear program has grown, China has sought to diversify its oil imports, buying more from other suppliers, including Angola and Saudi Arabia.

The largest foreign investor in Iran’s energy sector, China has slowed implementation of an estimated $40 billion in promised investments in return for an agreement with the Obama

This legislation, enacted in 2010, calls for mandatory investigations of foreign companies that sell Iran gasoline and other refined petroleum products and threatens to bar them from the US market. So far, the US government has sanctioned ten companies under the law,

none of them Chinese, even though China supplies a third of Iran’s gasoline imports, according to the Foundation for Defense of Democracies, a Washington-based think tank that provides research for congressional staffers crafting sanctions legislation.

Queried about this recently, Undersecretary of State for Political Affairs Wendy Sherman told the Senate Banking Committee that China “has exercised restraint” in regard to Iran’s energy development. She said the Obama administration had “seen reports that . . . Chinese companies have not finalized any new upstream or refinery projects [in Iran] since the enactment of CISADA.” Of the $40 billion in announced China-Iran energy investment deals, less than $3 billion appears to have actually been provided.

However, there are clear limits to how far China will go in squeezing Iran. China’s rapidly growing economy requires ever greater sources of energy, and Chinese officials do not

want to alienate the world’s second-largest oil producer after Saudi Arabia and the possessor of the second-largest natural gas reserves after russia. Beijing also regards Iran

as an important regional power. Iran has shown its ability to influence neighbors for good and for ill, and could wreak havoc on Arab Gulf oil producers if it chose. John Garver, a specialist on Iran and China at the Georgia Institute of Technology, has argued that China is playing a “dual game,” seeking to retain access to Iranian oil while remaining on good terms with the United States.

Thus Beijing recently invited senior staff of the Atlantic Council and other American think tanks to a conference entitled, “Potentialities of US-Chinese Cooperation in Central Asia

and the Middle East,” at which officials pledged to work with the United States on issues of common interest in this region. On the other hand, despite voting in favor of UN

sanctions that target Iran’s state-owned Islamic republic of Iran Shipping Lines (IrISL), China has facilitated circumvention of these measures. According to an investigation by the South China Morning Post, “IrISL continues to operate on the mainland under a network of

aliases and companies, which includes [at least 20] ships and companies registered in Hong Kong.”

China has also acted to prevent the disclosure of information that could deepen Iran’s isolation, blocking publication of a UN panel report that suggested North Korea and Iran have used China as a transshipment point for illegally sharing ballistic missile technology.

And China has lobbied the International Atomic Energy Agency not to reveal more evidence about alleged Iranian research into nuclear weapons technology—actions that could provide the basis for more sanctions.

While China would prefer Iran not to develop nuclear weapons for fear of making the Gulf region even more unstable, China does not feel threatened by the prospect of a nuclear weapons–capable Iran. According to Garver, some elements in the Chinese defense establishment would actually prefer a nuclear Iran—or at least an Iran that seems on the verge of acquiring nuclear weapons—if that compels the United States to retain substantial military forces in the Gulf rather than East Asia.

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The views, findings, and recommendations of this report are those of the authors alone and do not necessarily reflect the views of the United States Institute of Peace or the Woodrow Wilson International Center for Scholars.